Gofore: Pioneering the Future Digitalization 💻
Undervalued small cap with impressive growth rates 🧠
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Gofore is a Finnish consultancy company specializing in IT & digitalization. The business has been a fast grower over the last decade with impressive profitability metrics.
Gofore is well-positioned to continue to grow and is priced attractively in comparison to other investment opportunities.
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Gofore Investing Thesis
Gofore has a strong foothold in the digital transformation in Finland and beyond. The market is expanding in demand, and the need for IT expertise is only increasing. Gofore’s suite of digital & IT consultancy services is well-positioned to capitalize on this trend.
The company’s strategy is a mix of national expansion and growth, internationalization to new geographic areas, and acquisitions to grow the top line at 25% annually, and organic growth at 15% annually.
Gofore has a robust client base with many stable entities both from the public and private markets. This provides a predictable revenue stream.
Gofore’s track record speaks for itself, it has an expanding NPS score of 55 in 2023, which was at 43 in 2022. This is a good score, indicating that their customers are turned into promoters. For a consultancy firm, this means that they get repeat business from their clients.
The business of Gofore
Gofore is a Finnish company specializing in digital transformation and consultancy services. The company primarily serves public sector entities and large private sector organizations, offering a broad spectrum of services from management consulting to IT services.
Gofore's expertise in digital services includes IT consulting, design, development, and cloud services, making it a comprehensive provider for clients looking to modernize their operations or develop digital-first strategies.
The business model of Gofore is centered around providing tailored digital solutions that help clients improve efficiency, enhance user experiences, and enable digital innovations. Revenue is generated through several streams, primarily project-based consulting services. These projects often involve developing IT architectures, implementing digital platforms, and integrating systems which are critical for clients in adapting to digital changes. Additionally, Gofore provides continuous service agreements and maintenance, securing a stable revenue flow.
Gofore’s growth strategy includes geographical expansion and diversifying its service offerings. The company also focuses on acquiring smaller firms to broaden its expertise and increase market presence, further driving its revenue. As digital transformation becomes increasingly crucial for organizational success, Gofore capitalizes on this trend by positioning itself as an essential partner for digital innovation. This ensures Gofore's continued growth and profitability in the competitive IT consultancy industry.
Financials: Fast-Growing Digital Leader
Gofore has grown its top line consistently over the last decade with growth rates from 82% YoY in 2017, to 26% in 2023. The LTM growth is 15.5% YoY, but there has only been one quarter of 2024, so this number is not representative of the growth.
Over the last 5-year period, Gofore has compounded its revenues by 29% annually, gross profits by 23.5%, operating income (EBIT) by 29.2%, Net income by 32.45%, and free cash flows by 15.7%.
Per Share Growth
Revenue per share has compounded by 25% annually, EPS by 28.6%, FCFPS by 12.3%, and operating cash flow per share by 14%. The FCF and OCF base from 2019 was much higher (0.9) than the EPS base (0.4). However, we would like to see FCFPS grow at the same rate (or faster) than the revenue per share growth.
ROIC is consistently high, indicating that Gofore is good at allocating capital. Their strategy involves M&As, so keeping an eye on ROIC moving forward and the performance of their M&A activity is important for the long-term shareholder’s return.
Margins contracting slightly
Gross margins have been contracting over the last 5 years, from a high of 28.8% in 2019 to an LTM low of 23.9%. Gofore’s EBITDA and Operating margin have also contracted reflecting lower business momentum for the business. The post-pandemic environment has put pressure on Gofore’s margins, but their growth has been fantastic, so we’re assuming that this is a trade-off they have been willing to take.
Debt levels
Net debt for Gofore is in the negative. In the LTM they have -Euro19.3M of Net debt. Additionally, their Interest coverage is 32x. We should not be worried about Gofore meeting their debt obligations anytime soon.
Forward multiples
Gofore has seen its multiples contract since 2021. This is most likely due to margin contraction and lower growth levels. This double whammy is something investors are not too happy about. Contracting margins often reflect competitive forces going against the business.
Gofore is trading at a ~16X NTM earnings. A fair price for a fast-growing IT consultancy firm. However, the business has traded below 10X NTM earnings in the past.
Forward P/FCF is at ~16X NTM FCF, indicating a NTM FCF yield of 6.25%.
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